Life Insurance Lowdown

Why insurers collect your health information and more

How much do you know about life insurance? Many people can come up with a basic definition: Essentially, you give money to an insurance company so it can pay your heirs when you die. But that’s as far as most people’s knowledge goes.

LIMRA, formerly the Life Insurance and Market Research Association, developed a quiz to help people better understand what they know—and don’t know. Here are a few of the questions, along with answers. For the full quiz, go to tinyurl.com/y7dxlro3.

True or False: The primary reason insurers collect medical info is to have documentation of preexisting conditions when a claim is submitted.

A: False. Life insurance companies gather medical information so they can determine the appropriate premium to charge you based on your risk factors. People in excellent health with low risk factors get the best possible premium—similar to how people with excellent credit get lower interest rates on loans. Insurers accept people with preexisting conditions all the time; they may just charge them a higher premium. Insurers only use the documentation to deny a claim if the insured person falsified information on the application.

True or False: If a life insurance company goes bankrupt, the policies are canceled and the policy holders lose their benefit.

A: False. Each state has a life and health guarantee association to provide a safety net and protect policyholders if insurers go bankrupt. The amounts are limited, so it’s important to review your state’s limits.

True or False: A group life insurance policy provided by your employer will stay in effect if you leave your job.

A: False. It can be a good idea to opt in to a group life insurance policy at work because it may be a good deal. The caveat: It can disappear the day you leave your job, retire, or are let go. If you’ve relied solely on the group policy throughout your tenure, that means you could be left with no life insurance. On top of that, the premiums for any policy you buy at that point could be very high, depending on your age. That’s why it’s smart to have a personal policy and lock in the premiums at the earliest age possible.

Q: Various types of life insurance are offered. What type is appropriate when you want to cover a temporary need (e.g., a mortgage)?

A: Term insurance is designed to last for a specific duration, such as 10, 15, 20, or 30 years. You pay the premiums during that “term”; if you die during that “term,” your beneficiaries would receive the benefit. Term insurance is designed to cover budget items that last for a specified period, such as a mortgage payment or education expenses. That’s why insurers recommend that you time a term insurance policy to expire when those expenses run out—for instance, when you expect to pay off your mortgage and when your kids plan to be done with college.

Q: What type of life insurance policy initially has a higher premium for the same amount of coverage as term insurance?

A: Permanent life insurance such as Universal Life and Whole Life costs more because it doesn’t have an end date like term. A permanent policy lasts a lifetime to cover expenses such as funeral costs and income replacement. But the sooner you lock in your premium on a permanent policy, the lower it will be. Many people choose a combination of both term and permanent coverage because they have both types of needs.